Chapter 2. Maximum Mortgage Amounts/Cash Investment Requirements on Purchase Transactions Table of Contents

Transcription

1 Chapter 2, Table of Contents Chapter 2. Maximum Mortgage Amounts/Cash Investment Requirements on Purchase Transactions Table of Contents Section A. Calculating Maximum Mortgage Amounts on Purchase Transactions Overview... 2-A-1 1. Maximum Mortgage Amounts on Purchases... 2-A-2 2. Calculating Maximum Mortgage Amounts on Purchases... 2-A-4 3. Interested Third Party Contributions... 2-A-6 4. Inducements to Purchase... 2-A-8 5. Additions to the Mortgage Amount for Repair and Improvement... 2-A-11 Section B. Transactions Affecting Maximum Mortgage Calculations Overview... 2-B-1 1. General Information on Transactions Affecting Maximum Mortgage Calculations... 2-B-2 2. Identity-of-Interest Transactions... 2-B-3 3. Non-Occupying Borrowers... 2-B-6 4. Transactions Involving Three and Four Unit Properties... 2-B-8 5. Loan Transactions for Building on Own Land... 2-B Loan Transactions for Paying Off Land Contracts... 2-B Transactions Involving Properties For Proposed Construction, Under Construction or Existing Construction Less Than One Year Old... 2-B Manufactured Home Construction-Permanent Loans... 2-B-17 2-i

2 Chapter 2, Section A Section A. Calculating Maximum Mortgage Amounts on Purchase Transactions Overview In This Section This section contains the topics listed in the table below. Topic Topic Name See Page 1 Maximum Mortgage Amounts on Purchases 2-A-2 2 Calculating Maximum Mortgage Amounts on 2-A-4 Purchases 3 Interested Third Party Contributions 2-A-6 4 Inducements to Purchase 2-A-8 5 Additions to the Mortgage Amount for Repair and Improvement 2-A-11 2-A-1

3 Chapter 2, Section A HUD Maximum Mortgage Amounts on Purchases Introduction This topic contains information on maximum mortgage amounts for purchasing property, including the maximum insurable mortgage up-front mortgage insurance payments (UFMIP) statutory loan limits, and loan-to-value (LTV) limits. Change Date May 10, A.1.a Maximum Insurable Mortgage The maximum insurable mortgage is the lesser of the statutory loan limit for the area (typically a county, or metropolitan statistical area (MSA)), or applicable loan-to-value (LTV) limit, applied to the lesser of the sales price, or the appraised value. The Department of Housing and Urban Development (HUD) issues a Mortgagee Letter (ML) each year, announcing the new mortgage limits A.1.b Up-Front Mortgage Insurance Payments Most Federal Housing Administration (FHA) mortgages require the payment of an up-front mortgage insurance premium (UFMIP). The statutory loan amounts and LTV limits discussed in this handbook do not include the UFMIP. 2-A-2

4 Chapter 2, Section A 1. Maximum Mortgage Amounts on Purchases, Continued A.1.c Statutory Loan Limits Statutory loan amount limits vary by program and the number of family units within the dwelling. References: For current FHA standard and high-cost area mortgage limits, see the Department of Housing and Urban Development (HUD) Web site at or the FHA Connection at For information on the effect that secondary financing has on loan limits, see HUD C A.1.d LTV Limits The determination of the maximum LTV percentage available to the borrower is influenced by the particular mortgage insurance program the age of the property (for example, new or existing construction), and various transactions that affect the maximum mortgage calculation, as described in HUD B. Once determined, the LTV percentage is then applied to the lesser of the sales price or the appraised value in order to determine the maximum insurable mortgage. References: For more information on calculating maximum mortgage amounts, see HUD A.2 transactions that affect maximum mortgage calculations, see HUD B, and the effect that secondary financing has on LTV limits, see HUD C.5. 2-A-3

5 Chapter 2, Section A HUD Calculating Maximum Mortgage Amounts on Purchases Introduction This topic contains information on how to calculate maximum mortgage amounts on purchases, including the maximum mortgage calculation maximum LTV percentages for purchase transactions for proposed/existing construction the borrower down payment requirement the policy on closing costs, and credit card payment for the appraisal/credit report. Change Date May 10, A.2.a Maximum Mortgage Amount Calculation The maximum mortgage amount that FHA will insure is calculated by multiplying the appropriate LTV ratio by the lesser of the property s sales price, subject to certain required adjustments, or appraised value. In order for FHA to insure this maximum loan amount, the borrower must make a down payment of at least 3.5 percent of the lesser of the appraised value of the property or the sales price. References: For more information on required adjustments to the sales price, see HUD A.3 HUD A.4, and HUD A.5 the maximum LTV percentage on purchases for proposed and existing construction, see HUD A.2.b, and requirements for the borrower minimum cash investment, see HUD A.2.c. 2-A-4

6 Chapter 2, Section A 2. Calculating Maximum Mortgage Amounts on Purchases, Continued A.2.b Maximum LTV for Proposed/ Existing Construction For purchase transactions, the maximum LTV is 96.5 percent (that is, the reciprocal of the 3.5 percent down payment requirement) A.2.c Borrower Down Payment Requirement The borrower must make a down payment at least equal to 3.5 percent of the lesser of the appraised value of the property or the sales price A.2.d Policy on Closing Costs, Closing costs may not be used to help meet the minimum 3.5 percent down payment requirement. Closing costs are not considered in the mortgage amount/down payment calculation for purchase money mortgages A.2.e Credit Card Payment for the Appraisal/ Credit Report The borrower may use a credit card to pay for the appraisal and credit report. 2-A-5

7 Chapter 2, Section A HUD Interested Third Party Contributions Introduction This topic contains information on the effect of contributions by interested third parties on calculating the maximum mortgage amount, including a definition of interested third party contribution interested third party contribution amounts charges not considered interested third party contributions, and treatment of amounts exceeding contribution limit. Change Date May 10, A.3.a Definition: Third Party Contribution A third party contribution is a payment by an interested third party, or a combination of parties, toward the borrower s costs to close. Reference: For a more detailed definition of Third Party Contribution, see HUD A-6

8 Chapter 2, Section A 3. Interested Third Party Contributions, Continued A.3.b Interested Third Party Contribution Amounts The third party may contribute up to 6 percent of the property s sales price toward the buyer s closing costs, prepaid expenses, discount points and other financing concessions. The 6 percent limit also includes third party payment for permanent and temporary interest rate buydowns, and other payment supplements payments of mortgage interest for fixed rate mortgages and Graduated Payment Mortgages (GPMs) mortgage payment protection insurance, and payment of UFMIP. Note: Contributions exceeding 6 percent are considered inducements to purchase. Reference: For information on inducements to purchase, see HUD A A.3.c Charges Not Considered Interested Third Party Contributions Payment of real estate commissions or fees, typically paid by the seller under local or state law or local custom, are not considered an interested third party contribution A.3.d Treatment of Amounts Exceeding Contribution Limit Each dollar that exceeds the 6 percent limit discussed in HUD A.3.b must be subtracted from the property s sales price before applying the appropriate LTV ratio. Reference: For information on the maximum LTV percentage on purchases for existing and proposed construction, see HUD A.2 b. 2-A-7

9 Chapter 2, Section A HUD Inducements to Purchase Introduction This topic contains information on inducements to purchase that are used when calculating the maximum mortgage amounts, including payments considered inducements to purchase personal property inducements, and conditions for subtracting sales commissions. Change Date May 10, A.4.a Payments Considered Inducements to Purchase Certain expenses, paid by an interested third party, on behalf of the borrower, are considered inducements to purchase and result in a dollar-for-dollar reduction to the sales price of the property before applying the appropriate LTV ratio. These expenses include contributions exceeding 6 percent of the sales price contributions exceeding the actual cost of prepaid expenses, discount points, and other financing concessions decorating allowances repair allowances moving costs, and other costs determined appropriate by the HOC. Note: A dollar-for-dollar sales price reduction is also required for excess rent credit, as described in HUD B.6.f, and gift funds not meeting the requirements described in HUD B.5. 2-A-8

10 Chapter 2, Section A 4. Inducements to Purchase, Continued A.4.b Personal Property Inducements Personal property given by an interested third party to consummate the sale of a property results in a reduction of the mortgage. The value of the item(s) must be deducted from the sales price and appraised value of the property before applying the LTV ratio. Depending on local custom or law, certain items may be considered as part of the real estate transaction with no adjustment to the sales price or appraised value. The table below describes how to determine if personal property affects the sales price or appraised value. If the personal property item is a... car boat riding lawn mower furniture, or television range refrigerator dishwasher washer dryer carpeting window treatment, or other items determined appropriate by the Homeownership Center (HOC) Then... deduct the value of the item(s) from the sales price and appraised value before applying the LTV ratio. the HOC determines if the items are considered customary and affect the value of the property before applying the LTV ratio. Exception: Replacement of existing equipment or other realty items by the seller before closing, such as carpeting or air conditioners, does not require a value adjustment provided that a cash allowance is not given to the borrower. 2-A-9

11 Chapter 2, Section A HUD Inducements to Purchase, Continued A.4.c Conditions for Subtracting Sales Commissions Sales commissions paid by an interested third party on a borrower s present residence can be considered inducements to purchase, and should be subtracted from the sales price before applying the LTV ratio. The table below describes the conditions when a sales commission is subtracted from the sales price before applying the LTV ratio. If... Then... the interested third party treat the amount paid by the interested agrees to pay any portion of third party as an inducement to the borrower s sales purchase, and commission on the sale of the subtract dollar-for-dollar the amount borrower s present residence paid by the seller or builder from the sales price before applying the LTV ratio. a borrower is not paying a real estate commission on the sale of his/her present home the seller of the property being purchased by the buyer is paying a real estate commission that exceeds what is typical for the area, and the same real estate broker or agent is involved in both transactions treat the amount of commission paid by the seller that exceeds the normal commission as an inducement to purchase, and deduct that amount, dollar-for-dollar, from the sales price before applying the LTV ratio. 2-A-10

12 Chapter 2, Section A 5. Additions to the Mortgage Amount for Repair and Improvement Introduction This topic contains information on adjustments to the mortgage amount, either through allowable additions to the sales price or direct additions to the mortgage amount, including the policy on adding repair and improvement costs to the sales price the repair and improvement amount that can be added to the sales price repair and improvement exclusions energy-related weatherization items calculating the energy-related mortgage amount when repairs and energy-related items cannot be completed prior to closing adding solar energy system costs calculating loans on HUD REO sales with repair escrow, and energy efficient mortgage calculation. Change Date May 10, A.5.a Policy on Adding Repair and Improvement Costs to Sales Price Repairs and improvements may be added to the sales price before calculating the mortgage amount when the repairs and improvements are required by the appraiser as essential for property eligibility, and paid by the borrower, and the sales contract or addendum identifies the borrower as responsible for payment, and completion of the repairs. Important: Only repairs and improvements required by the appraiser may be included. Reference: For information on the repair and improvement amount that can be added to the sales price, see HUD A.5.a, and repair and improvement exclusions, see HUD A.5.c. 2-A-11

13 Chapter 2, Section A HUD Additions to the Mortgage Amount for Repair and Improvement, Continued A.5.b Repair and Improvement Amount That Can Be Added to Sales Price The repair and improvement amount that may be added to the sales price before calculating the maximum mortgage amount is the lowest of the amount that the value of the property exceeds the sales price the appraiser s estimate of repairs and improvements, or the amount of the contractor s bid, if available A.5.c Repair and Improvement Exclusions Repairs and improvements completed by the borrower before the appraisal are not eligible to be included when calculating the maximum mortgage. This amount becomes part of the borrower s required down payment A.5.d Energy-Related Weatherization Items The mortgage amount may be increased if the cost of energy-related weatherization items paid by the borrower is added to the property. Energyrelated weatherization items include thermostats insulation storm windows and doors, and weather stripping and caulking. These items may be added to both the sales price and the appraised value before determining the maximum mortgage amount. Note: A contractor s statement of the cost of work completed, or a buyer s estimate of the cost of materials must be submitted. Reference: For information on cost estimates and statements of costs of work for weatherization items, see HUD REV-1, Valuation Analysis for Home Mortgage Insurance. 2-A-12

14 Chapter 2, Section A 5. Additions to the Mortgage Amount for Repair and Improvement, Continued A.5.e Calculating the Energy-Related Mortgage Amount The energy-related amount that can be added when calculating the maximum mortgage amount is either $2,000 without a separate value determination up to $3,500, if supported by a value determination by an approved FHA roster appraiser or Direct Endorsement (DE) Underwriter, or more than $3,500 subject to a value determination by an approved FHA roster appraiser or DE Underwriter, and with a separate on-site inspection made by a FHA-approved fee inspector or DE staff appraiser A.5.f When Energy Related Items Cannot Be Completed Prior to Closing If repairs and energy-related items cannot be completed before loan closing due to weather-related delays, the lender must establish an escrow account to ensure all required repairs are eventually completed. References: For more information on repairs and improvements, see HUD , REV-2, Architectural Processing and Inspections for Home Mortgage Insurance, and satisfying repair requirements, see HUD A-13

15 Chapter 2, Section A HUD Additions to the Mortgage Amount for Repair and Improvement, Continued A.5.g Adding Solar Energy System Costs The cost of solar energy systems may be added directly to the mortgage amount before adding the UFMIP, and after applying the LTV ratio limits. The amount added is limited to the lesser of the solar energy system s replacement cost, or effect on the property s market value. The statutory mortgage limit for the area also may be exceeded by 20 percent to accommodate the cost of the system. Note: Active and passive solar systems, as well as wind-driven systems are acceptable. Reference: For more information on adding solar energy system costs, see HUD REV-1, Valuation Analysis for Home Mortgage Insurance A.5.h Calculating Loans on HUD REO Sales With Repair Escrow On a HUD Real Estate Owned (REO) property that requires no more than $5,000 for repairs to meet FHA s property requirements, 110 percent of the estimated cost of the repairs may be included in the mortgage amount. Reference: For more information on adding required repair costs on HUD REO properties, see ML A.5.i Energy Efficient Mortgage Calculation If the energy efficient improvements are cost effective as determined by the lender based upon the report from the HERS or energy consultant, 100 percent of the cost of the energy efficient improvements (subject to certain limits) may be added to the mortgage amount. Reference: For more information on the mortgage calculation for the Energy Efficient Mortgage Program, see HUD D. 2-A-14

16 Chapter 2, Section B Section B. Transactions Affecting Maximum Mortgage Calculations Overview In This Section This section contains the topics listed in the table below. Topic Topic Name See Page 1 General Information on Transactions Affecting 2-B-2 Maximum Mortgage Calculations 2 Identity of Interest Transactions 2-B-3 3 Non Occupying Borrowers 2-B-6 4 Transactions Involving Three and Four Unit 2-B-8 Properties 5 Loan Transactions for Building on Own Land 2-B-10 6 Loan Transactions for Paying Off Land 2-B-12 Contracts 7 Transactions Involving Properties for Proposed 2-B-15 Construction, Under Construction or Existing Construction Less Than One Year Old 8 Manufactured Home Construction-Permanent Loans 2-B-17 2-B-1

17 Chapter 2, Section B HUD General Information on Transactions Affecting Maximum Mortgage Calculations Change Date May 10, B.1.a Types of Transactions Certain types of loan transactions affect the amount of financing available to a borrower, and determine how to calculate the maximum mortgage amount. The types of transactions include identity-of-interest properties with non-occupying coborrowers three- and four-unit properties properties where a house will be constructed by a borrower on his/her land, and/or as a licensed general contractor payoffs of land contracts, and transactions involving properties under construction, or less than a year old. Note: Unless otherwise stated in this handbook, the mortgage calculation procedures described in HUD A.2 also apply. 2-B-2

18 Chapter 2, Section B 2. Identity of Interest Transactions Introduction This topic contains information on identity-of-interest transactions, including the definition of the term identity-of-interest transaction maximum LTV factor on identity-of-interest transactions, and exceptions to the maximum LTV factor for identity-of-interest transactions. Change Date July 6, B.2.a Definition: Identity of Interest Transaction An identity of interest transaction is a sales transaction between parties with family or business relationships. Reference: For a more detailed definition of identity of interest transaction, see HUD (Glossary) B.2.b Maximum LTV Factor on Identity of Interest Transactions The maximum LTV factor for identity of interest transactions on principal residences is restricted to 85 percent. 2-B-3

19 Chapter 2, Section B HUD Identity of Interest Transactions, Continued B.2.c Exceptions to the Maximum LTV Factor for Identity of Interest LTV Transactions Maximum financing above the 85 percent is permitted under certain circumstances. The table below describes circumstances in which financing above the 85 percent is permitted. Exception Family Member Purchase Description A family member purchases another family member s home as a principal residence. If the property is sold from one family member to another and is the seller s investment property, the maximum mortgage is the lesser of 85 percent of the appraised value, or the appropriate LTV factor percentage applied to the sales price, plus or minus required adjustments. Builder s Employee Purchase Reference: For a definition of the term family member, see HUD (Glossary). An employee of a builder purchases one of the builder s new homes or models as a principal residence. 2-B-4

20 Chapter 2, Section B 2. Identity of Interest Transactions, Continued B.2.c Exceptions to the Maximum LTV Factor for Identity of Interest LTV Transactions (continued) Exception Tenant Purchase Description A current tenant, including a family member tenant, purchases the property where he/she has rented for at least six months immediately predating the sales contract. Note: A lease or other written evidence to verify occupancy is required. Corporate Transfer The maximum mortgage calculation is not affected by a sales transaction between a tenant and a landlord with no identity of interest relationship. A corporation transfers an employee to another location purchases the employee s home, and sells the home to another employee. 2-B-5

21 Chapter 2, Section B HUD Non Occupying Borrowers Introduction This topic contains information on non-occupying borrowers, including the definition of the term non-occupying borrower transaction maximum LTV factor for non-occupying borrower transaction security instrument and note signature requirement LTV for two to four unit properties, and underwriting criteria for non-occupying borrowers. Change Date July 6, B.3.a Definition: Non Occupying Borrower Transaction A non occupying borrower transaction is a transaction involving two or more borrowers where one or more borrower(s) will not occupy the property as his/her primary residence. Reference: For a more detailed definition of non-occupying borrower transaction, see HUD (Glossary) B.3.b Maximum LTV Factor for Non Occupying Borrower Transaction When there are two or more borrowers, but one or more will not occupy the property as a principal residence, the maximum mortgage is limited to a 75 percent LTV. However, maximum financing, as described in HUD A.2, is available for borrowers related by blood, marriage, or law, such as spouses parent-child siblings stepchildren aunts-uncles, and nieces-nephews, or unrelated individuals that can document evidence of a family-type, longstanding, and substantial relationship not arising out of the loan transaction. Note: If a parent is selling to a child, the parent cannot be the coborrower with the child, unless the LTV is 75 percent or less. 2-B-6

22 Chapter 2, Section B 3. Non Occupying Borrowers, Continued B.3.c Security Instrument and Note Signature Requirement All borrowers, regardless of occupancy status, must sign the security instrument and mortgage note. Note: Cosigners do not execute the security instrument, but must sign the mortgage note B.3.d LTV for Two to Four Unit Properties To reduce risk exposure, mortgages with non-occupying borrowers are limited to one-unit properties if the LTV exceeds 75 percent. The nonoccupying borrower arrangement to assist in financing a property may not be used to develop a portfolio of rental properties. The financial contribution by the non-occupying borrower, and the number of properties owned may indicate that the family members are acting as strawbuyers B.3.e Underwriting Criteria for Non Occupying Borrowers FHA does not require that additional underwriting criteria, such as specific qualifying ratios, be met by either non-occupying borrowers, or occupying borrowers with sufficient credit. However, additional FHA underwriting criteria does apply to occupying borrowers with insufficient credit. Note: Lenders must judge each transaction on its merits. Reference: For information on underwriting criteria for borrowers with insufficient credit, see HUD C.3.c. 2-B-7

23 Chapter 2, Section B HUD Transactions Involving Three and Four Unit Properties Introduction This topic contains information on transactions involving three- and four-unit properties, including three and four unit property mortgage limit what is included in the monthly payment calculation for three and four unit properties net rental income calculation for three and four unit properties, and three and four unit property mortgage reserves. Change Date July 6, B.4.a Three and Four Unit Property Mortgage Limit The maximum mortgage for three and four unit properties is limited, so that the ratio of the monthly mortgage payment, divided by the monthly net rental income does not exceed 100 percent, regardless of the occupancy status. Note: The calculations described in the remainder of this topic are in addition to the calculations found in HUD A B.4.b What Is Included in the Monthly Payment Calculation for Three and Four Unit Properties The monthly mortgage payment calculation for three and four unit properties includes the following: principal interest taxes insurance (Principle, Interest, Taxes, and Insurance - PITI), including monthly mortgage insurance, and homeowner association dues computed at the note rate, if applicable. Reference: For more information on the maximum mortgage amounts, see HUD A.1, and HUD A.2. 2-B-8

24 Chapter 2, Section B 4. Transactions Involving Three and Four Unit Properties, Continued B.4.c Net Rental Income Calculation for Three and Four Unit Properties Net rental income for three and four unit property is calculated using the following formula: the appraiser s estimate of fair market rent from all units, including the unit the borrower chooses for occupancy, and minus the greater of the appraiser s estimate for vacancies, or vacancy factor used by the jurisdictional HOC. This net rental income calculation is used to determine the maximum loan amount. Borrowers must still qualify for the mortgage based on income credit cash to close, and projected rents received from remaining units. Projected rent may only be considered gross income for qualifying purposes. It cannot be used to offset the monthly mortgage payment B.4.d Three and Four Unit Property Mortgage Reserves For three- and four-unit properties, the borrower must have personal reserves equivalent to three months PITI after closing on purchase transactions. Reserves cannot be derived from a gift. Reference: For information on mortgage reserves, see HUD E.5.d, and HUD F.3.b, and TOTAL Scorecard and mortgage reserves, see the TOTAL User Guide at 2-B-9

25 Chapter 2, Section B HUD Loan Transactions for Building on Own Land Introduction This topic contains information on loan transactions for building on land the borrower already owns, including financing limits when building on own land LTV limits when building on own land, and using equity when building on own land. Change Date July 6, B.5.a Financing Limits When Building on Own Land A borrower is eligible for maximum financing when he/she acts as a licensed general contractor and is building a home on land that he/she already owns or acquires separately, and receives no cash from the settlement B.5.b LTV Limits When Building on Own Land When building on a borrower s own property, the appropriate LTV limits are applied to the lesser of the appraised value of the proposed home and land, or documented cost of the property. The documented cost of property includes the following: the builder s price, or sum of all subcontractor bids and materials cost of the land (if the land has been owned more than six months or was received as an acceptable gift, the value of the land may be used instead of its cost), and interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property. 2-B-10

26 Chapter 2, Section B 5. Loan Transactions for Building on Own Land, Continued B.5.c Using Equity When Building on Own Land Equity in the land (value or cost, as appropriate, minus the amount owed) may be used for the borrower s entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the appraised value. Replenishing the borrower s own cash expended during construction is not considered as cash back, provided that the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds used for construction B.5.d Determining If the Borrower Has Made the Required Down Payment When Building on Own Land In order to determine if a borrower has made the required 3.5 percent cash investment, or its equivalent in land equity when building on his/her own land, all such mortgage transactions must be summarized using only HUD LT, FHA Loan Underwriting and Transmittal Summary. Lenders are reminded that they must record the sum total of the documented cost of the property, including the builder s price, or the sum of all subcontractor costs, materials, etc. the cost of the land or, if owned for more than six months or was received as an acceptable gift, its appraised value, and interest and other costs associated with any construction loan obtained by the borrower to fund construction of the property. Additionally, the calculated loan-to-value ratio (which is to be the same value used when seeking a risk clarification from FHA s TOTAL), must reflect, as it does on other purchase transactions, the lesser of the sales price, or the appraised value. 2-B-11

27 Chapter 2, Section B HUD Loan Transactions for Paying Off Land Contracts Introduction This topic contains information on loan transactions to pay off land contracts, including financing limit when paying off land contracts LTV factor when paying off land contracts, and using equity when paying off land contracts. Change Date July 6, B.6.a Financing Limit When Paying Off Land Contracts If a borrower does not receive cash at closing, his/her new mortgage may be processed as a purchase or refinance transaction with maximum FHA-insured financing if he/she uses the loan to complete payment on a land contract contract for deed, or other similar type of financing arrangement in which the borrower does not have title to the property B.6.b LTV Factor When Paying Off Land Contracts When the loan proceeds are used to pay the outstanding balance on the land contract and eligible repairs and renovations, the LTV factor is applied to the lesser of the appraised value of the land and improvements, or total cost to acquire the property, which includes the original purchase price, plus any documented costs the borrower incurs for rehabilitation, repairs, renovation, or weatherization, closing costs and reasonable discount points, if treated as a refinance. References: For additional information on refinances, see HUD B.1, and use of rent credits, see HUD B.6.f. 2-B-12

28 Chapter 2, Section B 6. Loan Transactions for Paying Off Land Contracts, Continued B.6.c Using Equity When Paying Off Land Contracts Equity in the property (original sales price minus the amount owed) may be used for the borrower s entire cash investment. However, if the borrower receives more than $500 cash at closing, the loan is limited to 85 percent of the appraised value. Replenishing the borrower s own cash expended for repairs, improvements, renovation, or weatherization is not considered as cash back, provided that the borrower can substantiate with cancelled checks and paid receipts all outof-pocket funds for the improvements. 2-B-13

29 Chapter 2, Section B HUD Transactions Involving Properties for Proposed Construction, Under Construction or Existing Construction Less Than One Year Old Introduction This topic contains information on transactions involving properties for proposed construction, under construction or with existing construction less than one year old, including financing limit, and criteria for maximum financing. Change Date May 10, B.7.a Financing Limit Properties that are proposed, under construction or existing construction less than one year old are limited to 90 percent financing. The 90 percent financing for properties proposed, under construction, or existing construction less than one year old is calculated by using the lesser of the appraiser s estimate of value, or sales price, plus or minus required adjustments for seller contributions inducements to purchase, and/or additions to the mortgage amount. Reference: For more information on required adjustments, see HUD A. 2-B-14

30 Chapter 2, Section B 7. Transactions Involving Properties for Proposed Construction, Under Construction or Existing Construction Less Than One Year Old, Continued B.7.b Criteria for Maximum Financing The table below describes the criteria that properties must meet to be eligible for greater than 90 percent financing, whether or not the property has been previously occupied. Criteria Approval of Dwelling Site Plans Local Jurisdiction Building Permit and Certificate of Occupancy Builder s Warranty Dwelling Relocation Description The dwelling s site plans and materials were approved before construction began by the Department of Veterans Affairs (VA) an eligible DE underwriter, i.e. Conditional Commitment issued prior to framing, or an early start letter issued by a DE underwriter. The local jurisdiction has issued both a building permit or equivalent prior to construction, and Certificate of Occupancy or equivalent. Note: This does not apply to condominiums or manufactured housing. These properties have special circumstances for financing approval. The dwelling is covered by a builder s ten-year insured warranty plan that is acceptable to HUD. The dwelling will be moved to a new location, and is eligible for an insured mortgage at the new location based on approval of the dwelling site plan criteria listed previously in this table. 2-B-15

31 Chapter 2, Section B HUD Manufactured Home Construction-Permanent Loans Introduction This topic contains information on construction-permanent (CP) loans for manufactured homes, including manufactured home CP loan is a purchase transaction basic criteria for determining maximum mortgage amount for manufactured home CP loan determining property status for a manufactured home determining length of ownership for a manufactured home formulae for determining maximum mortgage amount on a manufactured home CP loan maximum mortgage calculation for manufactured home CP loan based on total cost or itemized value maximum mortgage calculation for manufactured housing CP loan based on allowable LTV maximum mortgage calculation for manufactured home CP loan based on existing indebtedness, and additional concerns for calculating the maximum mortgage amount on manufactured home CP loan. Change Date October 26, B.8.a Manufactured Home CP Loan is a Purchase Transaction For purposes of underwriting and calculating the maximum mortgage amount, the CP loan on a newly-constructed manufactured home should be considered a purchase loan transaction, requiring a minimum 3.5% cash investment of the Total Cost or Value (including land). To maintain consistency with FHA Connection data requirements and the Uniform Residential Loan Application, the purpose of the loan transaction should be designated as CP. Reference: For more information on Construction Permanent loan characteristics and requirements, see A. 2-B-16

32 Chapter 2, Section B 8. Manufactured Home Construction-Permanent Loans, Continued B.8.b Basic Criteria for Determining Maximum Mortgage Amount for Manufactured Home CP Loan To determine the maximum insurable mortgage amount for a manufactured housing CP transaction, the lender must consider the property status length of ownership, and accepted formula to determine value. The length of time the property was owned in a given property status will determine whether a transaction is considered a CP or refinance transaction. CP transactions involve manufactured homes with acceptable property status that are proposed for construction under construction, or existing construction less than 12 months old. References: For more information on maximum mortgage amount calculations on refinance transactions see A A B.8.c Determining Property Status for a Manufactured Home Property status refers to whether or not the property is classified or taxed as real property and whether the personal property title has been purged in compliance with state law. Reference: For more information on purging personal property title on a manufactured home, see A.1.j B.8.d Determining Length of Ownership for a Manufactured Home Length of ownership refers to how long the prospective borrower has held an ownership interest in the manufactured housing unit and land. 2-B-17

33 Chapter 2, Section B HUD Manufactured Home Construction-Permanent Loans, Continued B.8.e Formulas for Determining Maximum Mortgage Amount on a Manufactured Home CP Loan The accepted formula to determine total cost or itemized value refers to calculating the mortgage amount based on total cost or itemized value maximum allowable loan-to-value (LTV) percentages, and existing indebtedness. The maximum insurable mortgage amount is determined by the lowest of the three calculations using the three formulas above. In a CP transaction, itemized value should be applied when the manufactured home unit, the land, or both have been owned for 6 months or more, and less than 12 months. If either the unit or the land has been owned for less than 6 months, the lesser of total cost or itemized value should be applied. Evidence must be provided to certify how long the borrower has owned the land and/or manufactured unit. A contract or payoff statement for the land is required if it is currently encumbered by a lien payable by the borrower. References: For more information on the formulas used to determine the maximum mortgage amount on a manufactured home CP loan based on total cost or itemized value, see B.8.f maximum allowable loan-to-value (LTV) percentages see B.8.g, and existing indebtedness, see B.8.h. 2-B-18

34 Chapter 2, Section B 8. Manufactured Home Construction-Permanent Loans, Continued B.8.f Maximum Mortgage Calculation for Manufactured Home CP Loan Based on Total Cost or Itemized Value 1. Mortgage Amount based on Total Cost or Itemized Value a. Total Cost or Itemized Value: Unit Land OR Combined Construction Hard Costs Soft Costs Total Cost or Itemized Value Cost b. Minimum Cash Investment: Total Cost or Itemized Value from 1a x 3.5% Required Statutory Investment c. Subtract Minimum Cash Investment from Total Cost or Itemized Value Amount based on Total Cost or Itemized Value (1a-1b) B.8.g Maximum Mortgage Calculation for Manufactured Home CP Loan Based on Allowable LTV 2. Amount based on Maximum Allowable Loan-to-Value Percentages Lesser of Total Cost or Itemized Value or Appraised Value x Applicable Maximum Loan-to-Value Percentage: 96.5% for purchase transactions Amount based on Maximum Allowable Loan-to-Value Percentages 2-B-19

35 Chapter 2, Section B HUD Manufactured Home Construction-Permanent Loans, Continued B.8.h Maximum Mortgage Calculation for Manufactured Home CP Loan Based on Existing Indebtedness 3. Amount Based on Existing Indebtedness Unit Less Trade-in ( ) Land Construction Hard Costs Soft Costs Borrower Paid: Discount Points Prepaids Closing Costs Amount Based on Existing Indebtedness 2-B-20

36 Chapter 2, Section B 8. Manufactured Home Construction-Permanent Loans, Continued B.8.i Additional Concerns for Calculating the Maximum Mortgage Amount on Manufactured Home CP Loan Financing on a manufactured home being constructed and installed is considered a construction loan or construction line-of-credit. Associated construction financing costs are to be itemized on a draw request or cost breakdown form. The file must include the contract or sales invoice for the manufactured home unit and the contract for the land. The construction loan [hard] costs and construction loan financing [soft] costs must be identified. Lenders may obtain and provide information from the general contractor or another party who has knowledge of the related costs for completion of required work items. The major installation charges require supporting documentation and separate invoices for the manufactured unit and the contractor s foundation and set-up costs. Razing and removing existing properties is considered part of the site preparation and may be included in the calculations as a component of the construction costs. If the manufactured home dealer is the general contractor for the foundation and installation, the cost of the unit and additional charges must be itemized on an invoice. Aggregate amounts for total costs are not acceptable. 2-B-21